Bank can be sued for failed PPP loan application

A bank can be sued for allegedly misleading a company and failing to process its application under the federal Paycheck Protection Program.

Judge Norman K. Moon of the Western District of Virginia rejected the bank’s argument that it had no contract with the company.

The judge said the plaintiff sufficiently alleged that, because the bank failed to process its loan application as promised, the plaintiff could show contractual damages of almost $1 million in PPP money that would have been forgiven.

The opinion is Ironworks Development LLC v. Truist Bank (VLW 022-3-498).

Failed application

Ironworks Development received a first-round PPP loan after applying through Truist Bank. When the government offered another round of PPP loans in January 2021, Ironworks’ parent corporation again applied through Truist.

Truist sent a letter to Ironworks saying that it was “unable to process” the application in the amount requested. It offered two options: seek a lower loan amount or submit additional information.

Ironworks responded in writing that it would seek the lower amount and agreed to the terms of Truist’s offer, including that Ironworks couldn’t apply for a PPP loan with another lender because the government would automatically reject all of their pending applications.

Truist submitted Ironworks’ application at the end of February 2021. When the government pointed out that the parent corporation hadn’t received first round loans and was therefore ineligible for the second round, Ironworks submitted another application in early March 2021.

After an initial hold was quickly resolved, a second automated hold required that Truist check and select “Submit Lender Certification” in the government’s online system.

Ironworks claimed that, instead of doing so, Truist “‘repeatedly made misleading and false statements … about the PPP loan status.’”

Ironworks cited three times in March 2021 where Truist said the application was submitted, that it would provide updates or that it didn’t know why the government was holding up the process.

In July 2021, Ironworks learned in an email from Truist’s PPP portal that its application had been denied because the lender certification hadn’t been completed before the deadline.

Ironworks filed suit. In its breach of contract complaint, the company said that once it accepted the terms offered in Truist’s letter the bank was contractually bound to submit the company’s PPP loan application for the agreed amount.

Further, Ironworks said it would have been simple for Truist to resolve the second hold.

Ironworks claimed it was damaged by the loss of nearly $1 million in loans that would have been forgiven because Truist failed to process the application.

Truist moved to dismiss the claim.

Valid contract

Truist argued that Ironworks hadn’t suffered an injury because the alleged contract for the second loan was between it and Ironworks’ parent corporation and pertained solely to the initial application before Ironworks reapplied in its own name.

But Moon said the bank had already conceded the contract was between it and Ironworks.

“In its Opposition … Defendant repeatedly referred to Plaintiff as the letter’s addressee [and] characterized the letter as ‘an agreement that Truist would adjust the amount of the proposed loan in Plaintiff’s application,’” the judge wrote.

Offer and acceptance

Moon also rejected Truist’s argument that Ironworks failed to plausibly allege a claim for breach of contract.

“At a minimum, Plaintiff has alleged that, through the SBA Letter, the Defendant gave it two options, and that Plaintiff accepted its second option, therein accepting Defendant’s offer to ‘process [Plaintiff’s] PPP loan in the above amount,’” the judge said. (Emphasis in the original.)

He found those facts sufficient to establish an offer, acceptance and bargained-for exchange constituting a benefit to both parties.

Moon further concluded that both parties incurred a detriment because Truist agreed to process the loan for a fee, while Ironworks agreed to apply for a lower amount and couldn’t apply with any other lenders.

Truist also argued that Ironworks failed to plausibly allege a breach of the bank’s obligations or that any injury suffered was caused by the alleged breach.

But Moon disagreed.

“Plaintiff alleges that the reason it never received the loan ‘had nothing to do with its failure to meet any requirements or eligibility, or anything to do with the SBA’ as ‘[a]ll those things were in order,’” the judge said. “Rather, Plaintiff never received the second-round loan because ‘Defendant failed to “process” Plaintiff’s application as it promised.’”

The judge also credited allegations that Ironworks was “damaged by the breach because the breach caused Plaintiff not to receive ‘nearly $1 million in PPP money that would have been forgiven.’”

Accountable stewards

Jonathan Jacobs, of counsel to Zoblaw in Washington, D.C., said he filed Ironworks’ complaint against Truist knowing it would be an uphill battle.

“There’s a lot of caselaw about how banks can do whatever they want with your money,” he told Virginia Lawyers Weekly.

Unlike a normal bank loan, Jacobs pointed out that PPP loans were “completely different because the money didn’t belong to the banks, who were acting as gatekeepers and stewards of free government money.”

He added that he’s confident his client isn’t the only one who lost out.

“Some people got hoodwinked because they chose banks that negligently took more applications than they could handle and those banks need to be held accountable as stewards over this public money,” he said.

And while he acknowledged this decision was specific to PPP, Jacobs said he’s “beyond pleased that we get to litigate some of these issues.”

Attorneys for Truist declined to comment about ongoing litigation.